Business Owners Time For A Reality Check About Financing
Jun 20, 2009
Business owners need to prepare themselves for the realities of the new borrowing and lending environment. Some of that preparation requires taking action, and some of it requires developing a new mind set. Let’s talk about the mental side first.
Start with a clean slate! Business owners need to clear their minds of old assumptions and understand:
• Lenders will ask a lot more questions. Don’t expect credit without answering them! There will be a new level of interest in your business and more requests for financial and operational information than in recent years.
• Interest spreads will go up. Whether your interest rate is based on Prime, LIBOR or Treasuries, the spread over that reference rate is likely to increase. Be prepared for minimum rates on floating rate debt.
• Collateral and guaranties are back: Unsecured loans and lines of credit were easier to get when everyone projected the economy to move onward and upward indefinitely. With that assumption no longer valid, lenders will look at collateral as their margin of safety.
• Your lender may just not want to do business with you anymore. This is the hardest one for many business owners to come to terms with. Don’t take it personally. Many decisions are now being made several levels above your local loan officer, and these decisions are not all about you. Banks have many big picture issues to worry about.
Take Action! Here are several critical steps that all business owners need to take:
• Understand cash inflows and outflows. You must be able to understand and communicate how cash is generated and used in your business. The philosophy “I just sell and leave that stuff to my accountant” will not work going forward. Get help if you need it.
• Begin preparing cash flow projections. A cash flow projection is the roadmap that shows where the business is going. To carry the road analogy a bit further, it also will show if a business is going to run out of fuel…cash…if it continues on its current path. Get help if you need it.
• Talk to lenders – old and new. Find out what concerns your current lenders have. Are there concerns about your industry? Are there problems renewing credit in the amounts provided previously? Consider locating other lenders who may not have some of the same issues as the current lender. In any case, plan on this process taking more time than usual…more time to “sell” your story to the lender, and more time for any deal to be approved. Get help if you need it.
Time to get to work!